What Is the Mechanism of a ‘Decentralized Liquidator’ in a Lending Protocol?
A decentralized liquidator is an external bot or user who monitors the blockchain for under-collateralized debt positions (CDPs). When a CDP's collateralization ratio falls below the required threshold, the liquidator calls the protocol's liquidation function, repaying a portion of the debt and taking the collateral at a discount (the liquidation penalty) as profit.
This competitive process ensures rapid, market-driven debt resolution.
Glossar
Collateralization Ratio
Margin ⎊ The collateralization ratio, within cryptocurrency and derivatives, represents the proportion of collateral deposited relative to the value of the underlying asset or open position; it functions as a critical risk management parameter, directly influencing systemic stability and counterparty exposure.
Liquidator
Role ⎊ A liquidator is a critical component of risk management in decentralized finance and leveraged trading platforms.
Decentralized Liquidator
Algorithm ⎊ A decentralized liquidator is an autonomous software agent or bot designed to monitor collateralized debt positions (CDPs) on a decentralized finance (DeFi) lending protocol.